Some Experts Worried about Junk Bond Bubble

Junk bonds have registered an impressive rally for most of the past 3 ½ years, and the rally has intensified in recent months.

The BofA Merrill Lynch High Yield 100 Index has generated a total return of 11.2 percent so far this year. That has many market participants worried that the market has run up too far too fast.

With interest rates close to zero, investors are desperate for yield, and junk bonds represent one of the few places where they can find it. Some conservative junk bond mutual funds yield more than 6 percent.

Investors threw a record $34 billion into junk-bond mutual funds in the first nine months of the year, The Wall Street Journal reports.

But investors are so eager that they’re taking on paper from weaker and weaker companies, and that’s a major risk.

"We're concerned about it," George Rusnak, director of fixed income at Wells Fargo, told The Journal. He said he is trimming his clients' exposure to junk bonds, a year after building it up. "We don't see as much opportunity going forward," he said.

The tide may actually be turning. Junk bond funds saw their first outflows last week in the last 17 weeks – to the tune of $410 million, according to EPFR Global.

Investors "are not ready to make the massive, the-world-is-OK trade," Colleen Denzler, global head of fixed income strategy at Janus Capital Group, told Reuters.